Forex Swap Rates Explained

Trading the Spot Forex market you may have noticed that when you hold a position overnight, you receive or are charged a fixed rate of interest on your position. When developing a trading system which holds positions overnight it is very important to take account of these overnight swap rates as they can affect a strategies performance.

Swap Rates/Rollover Interest Explained

Interest is either debited or credited to traders who hold open currency positions at 5pm E.S.T. This happens every day, with positions opened for a multiple days being debited or credited interest for each and every day the position remained open through 5pm E.S.T.

Whether a trader is charged or receives interest depends on the two currencies involved and the position the trader takes on the pairing. As currencies trade in pairs, you always need to borrow one currency in order to able to buy another. From this it follows that you pay interest on the currency that you are borrowing and receive interest on the currency you are selling. Say we are trading the fictional currency pairing AAA/BBB, the following possibilities exist:

If you are long AAA/BBB. You will be charged interest for borrowing AAA, and will receive interest for lending BBB.

If you are short AAA/BBB. You will be charged interest for borrowing BBB, and will receive interest for lending AAA.

If the difference between the interest charged and received is positive, you will receive the difference in your account. If however the difference between interest charged and received is negative, you will have the difference taken out of your account.

This can be demonstrated with the following example:

Example 1

We enter into a long position in the USD/EUR and hold the position overnight. The borrowing interest for USD is 3.6%. To calculate the interest on one standard lot we use the following calculation (0.036*100000)/365=$9.8 USD. Since our imaginary account this maintained in dollars we do not need to convert this amount into dollars.

The lending rate on offer for the EUR is 4.0%. To calculate the interest we need to take into account the USD/EUR exchange rate, the calculation is as follows (0.04*100000*1.33349)/365=$14.61 USD. With our position being long, we subtract our borrowing costs from the interest we received for lending the EUR. This means that in the above situation we will receive a total of $4.80 in our account.

Different Brokers, Different Calculations

While the above method is the standard way to calculate overnight swap rates/rollovers, the situation is in fact more complicated than in the above example. Most brokerages use interbank overnight rates when calculating swaps and update them daily. Although some brokerages update their rollover rates much less frequently. It is not uncommon brokerages add an extra charge on top of these rates, typically around 3% APR (not of course with forex payment companies like Moneycorp). This is why there are significant differences in swap rates between different brokerages. To make matters even more complicated brokerages display in different ways.

You may have noticed that a number brokerages offer swap free accounts to attract Muslim clients who are forbidden by their religion from engaging in deals that bear interest. These accounts typically have wider spreads to make up for the lack of overnight rollovers.

Those looking to compare swap rates can do so at Zulutrade, where it is possible to compare swap rates from over 100 different brokers. Those who wish to regularly hold positions overnight should definitely take rollover rates into account.

2 thoughts on “Forex Swap Rates Explained”

Long EUR/TRY means you borrow TRY to buy (lend) EUR. You receive interest on EUR and pay interest on TRY. You profit if the EUR rises. Notice that all broker swap rates for long EURTRY are negative now, this is because TRY interest rate is much higher. Short EURTRY pays very high swap.

Instead you say the equivalent of: “if you are long EUR/TRY you will be charged interest for holding EUR and receive interest for lending TRY”. And your worked example implies long EURTRY would return a high swap!